Managing Money in the Midst of Transition

What do you do when you are in transition, particularly a career or business transition, that doesn’t allow you to manage your money as you would otherwise? After following my husband through a rather long and unplanned career change, I learned a few things about managing money more consciously during such challenging times.

As lovely as it would be to make a career change bolstered by a year’s worth of savings and a neatly trimmed expense budget, it’s not always realistic. Oftentimes, when people decide to change careers or start up new business ventures, they are fairly deep in their desperation to get out of their current situation. Having all your ducks in a row financially may not be the primary concern. After all, career change is about much more than finances and should be evaluated by long-term physical, emotional, psychological, and spiritual gains, as well monetary realities.

In our case, after a number of years, lots of reflection, and a few costly mistakes, my husband and I decided that the career change was positive overall, regardless of financial setbacks.

Here are a few ideas we learned to help manage finances while transitioning in life that might minimize or eliminate some of those challenges:

1. Know The Numbers. First and foremost, look into all of your hard finances, including: calculating what you earn from all sources; knowing how much you spend and on what; researching what kind of debt, savings, and investments you have overall; determining your credit score; and examining the employer-provided benefits you might need to cover. After crunching the numbers, write the information down in one spot so you can refer to it at a moment’s notice.

2. Make Sacrifices. Even if you have substantial savings, find ways to cut back and reduce your cost of living. It is best to alter aspects of your lifestyle early, before a real need for money arises. You may actually find that you won’t want to go back to some of the excessive spending once you make more money.

3. Maintain an Investment Strategy. Create and maintain an investment strategy so you remain connected to wealth and abundance during your transition. Choose something meaningful to you, even if it is not a number one priority. If saving for your child’s college fund is the most important thing to save for, do that instead of adding to your retirement fund. Transitioning is already an insecure time; keep stability by saving for something that matters the most to you.

4. Find Long-Term Financing. If you need to borrow money for a business investment, try to find long term financing so that large amounts do not need to be repaid before the business is profitable. Bank loans or equity loans that can be repaid over several years will give you breathing room to build cash flow and spread the payments over time.

5. Keep Life Liquid. Create access to your money. This is not the time to tie up your funds in investments that are difficult or costly to access. Liquid money is most useful during transitions.

6. Set a Limit. Establish a threshold of cash reserves that you will not go below. That money is not available for anything- especially not for investing in the new business. It is only to be used if a true emergency arises.

It is important to think outside the box during this interim time and give yourself permission to take some risks while playing the money game with a new set of rules. Most of all, pay close attention to your finances – this will give you the best shot possible in order to pursue your goals.

Tackle All Bad Debt

You can think of financial freedom like a video game. You’ve got to get through 7 Levels to make it to Financial Freedom. In this post, I will outline more about Level I – tackling all bad debt. First, let’s distinguish what makes debt good or bad.

Good Debt is debt that helps you, currently or potentially, produce more. Student debt, ostensibly, will help you generate more income in your career, therefore it’s considered good debt. Corporate borrowing that helps you grow the company is good debt. Even mortgage debt is considered good debt because it stabilizes your second biggest expense, the mortgage and allows you to own a real estate asset. Most all good debt has advantageous treatment in the tax code (meaning the interest on the good debt is generally tax-deductible). So what is bad debt?

Bad Debt typically comes from consumption. It’s credit card debt. It’s auto-loan debt. This debt is not helping you produce more; it’s all consumption based. If you’re not building to produce more income or potential capital appreciation, then it’s bad debt. And, typically bad debt has no favored tax treatment (it’s not tax deductible).

The most important aspect of Level I of the game to win financial freedom has three main lessons to learn. One is to be able to budget. You’ve got to be able to create a budget and stick to it. If you can’t do that, it’s hard to get ahead in other parts of the game. Two is that you pay yourself first. Too many times, when some spending goes over in the budget, everyone else gets paid but yourself. The store gets paid, the rent gets paid, the credit card gets paid, but somehow you don’t have money to pay yourself. Learning to pay yourself first, before you pay rent or anything else, is a critical life lesson to learn at Level I. Three, the final lesson to learn is to be able to produce more than you consume. You can do that by either limiting spending or producing more income. It’s with the extra production capacity that you’ll be paying off all your bad debt.

I would say you’re generally ahead of the game if you can get all your bad debt paid off in your 20’s. It’s hard because your big producing years aren’t coming until your 40’s and 50’s. But, if you learn the three big lessons of Level I while you’re not making a ton, then that will help you all the more when you’re on Level II and beyond.